Utilities Thankful for Mergers

"Our [independent power producer] analyst, Elizabeth Parrella, noted that Williams' views on forward power markets, while candid, were among the most bearish we've seen in terms of timing of recovery," Fleishman wrote.

Still, Fleishman expects Williams to weather the current storm -- and perhaps exit the power business entirely -- as the industry struggles to recover. He believes the company could sell its Western power book alone for up to $1.5 billion. It could then pay down debt and be poised for a turnaround over the next few years.

"We remind investors that this is a 2004/2005 debt reduction/business turnaround story," he wrote. And the power business "as currently packaged is a distraction to the story."

Grab Bag

Meanwhile, Dynegy (DYN Quote) appears to be stuck with its own noncore "distraction."

The company, which continues to focus on its unregulated businesses, has failed to sell its highly marketable electric utility. Although it found a willing buyer for the asset -- when Exelon (EXC Quote) stepped forward with a $2.2 billion offer -- it failed to secure the legislative concessions necessary for the deal to go through. As a result, the company is now looking for new ways to finance the business instead of selling it off to pay down debt.

"While we are disappointed that the legislation did not pass, we must now focus on the future with Illinois Power as a part of our organization," Dynegy CEO Bruce Williamson announced. "Our first priority will be to improve Illinois Power's financial condition by creating a sustainable cost structure for this business."

Analysts haven't given up on a sale, however. They believe that buyers -- including Exelon -- remain interested in the utility.

"Industry publications have suggested that several other entities had expressed interest in acquiring IP," J.P. Morgan analyst Anatol Feygin wrote. "A new bidder would not necessarily pay less for IP than EXC. ... Despite the transaction's termination, we continue to view a sale of IP as a question of when, not if."